From green labels to real‑world data: what FCA ESG rules could mean for mortgage and property lending
The FCA’s move to bring ESG ratings firms inside the regulatory perimeter has largely been treated as a capital markets story. For mortgage and property lenders, though, the bigger question is whether it will finally force an upgrade in the quality of ESG data – especially around EPCs – and how that could flow through to pricing, product design and funding costs over the rest of the decade.
For Edward Twiddy, director of ESG at Atom bank, the current foundations are not yet strong enough to support the weight of regulatory ambition.
“There are understandable concerns around EPC data. Our own study with Experian compared EPC estimates with actual meter readings and found significant discrepancies, with a real danger of emissions being substantially over-reported,” he said. “The fundamentals are there – we still need to take action to improve the efficiency of our properties, whether residential or commercial. But if we can improve the reliability of the data so that it reflects real-world use, that should act as a catalyst for more innovative product design.”
That challenge goes to the heart of the FCA’s consultation: ESG regulation will only add value if it improves decision-useful data rather than layering inconsistent ratings on top of already noisy property metrics.
What the FCA is changing – and why it matters in mortgage
Under the proposals, ESG ratings providers would, for the first time, be directly supervised. Agencies would need to disclose methodologies and data sources, strengthen governance and controls, identify and manage conflicts of interest and meet proportionate standards aligned with international norms such as IOSCO.
On the surface, that looks far removed from the day-to-day work of mortgage teams. In practice, ESG ratings increasingly feed into:
• Which banks and building societies institutional investors are prepared to back
• The pricing of bank and covered bonds
• Appetite for mortgage-backed and green bond issuance
• How supervisors and investors judge climate, social and governance risks in loan books
Better-regulated ESG ratings do not move the price of a two-year fix overnight – but they do influence who gets the cheapest capital, on what terms and for which types of collateral. Over time, that matters for a housing market where energy performance and climate risk are rising up the agenda.
The EPC problem: blunt tools, big consequences
Quality of property-level data, particularly EPCs, is one of the sharpest pressure points. For lenders, EPC ratings already act as:
• A regulatory reporting input for climate and sustainability disclosures
• A product design lever underpinning green mortgage discounts
• A collateral and credit risk flag for older, energy-inefficient stock
If those ratings do not reliably reflect real-world energy use, banks risk misstating the carbon profile of their mortgage books, mis-targeting green and brown pricing differentials and ultimately rewarding or penalising the wrong assets.
That is why Twiddy emphasises meter-level validation rather than paper labels. For him, greater transparency and consistency in methodologies should help bring external ratings, lenders’ internal analytics and on-the-ground performance into closer alignment.
“For brokers, the practical benefit is straightforward,” he argued. “More confidence that ‘green’ or ‘sustainable’ products are tied to genuine performance, not just paper ratings.”
Product innovation: Better Buildings as a glimpse of the future
Atom bank’s Better Buildings proposition offers an early glimpse of what a more data-rich, ESG-aware market could look like. Commercial premises with higher efficiency ratings – whether via EPC or BREEAM – qualify for discounted rates. Twiddy says the structure has proved incredibly popular with brokers and SME clients, and the bank intends to build on it as part of its pledge to be climate positive from 2035.
As ESG ratings tighten and investors push harder for credible transition plans, more lenders are likely to follow suit. That could mean:
• Broader green ranges across residential, buy-to-let and commercial segments
• More granular pricing, with EPC bands, building certifications and climate risk feeding into margins
• Greater use of sustainability-linked structures, where rates step up or down depending on borrowers hitting agreed efficiency or retrofit targets
The FCA’s oversight of ratings agencies will not, on its own, create this product wave. But by improving confidence in the third-party scores lenders rely on, it should make innovation less risky.
Funding, capital and the “ESG-strong” mortgage book
Behind the product story sits a capital story. More reliable and comparable ESG ratings will make it easier for investors to distinguish between lenders with credible climate and social strategies and those with weaker controls, opaque data or high exposure to climate-vulnerable assets.
For mortgage-heavy institutions, that could translate into marginal differences in wholesale funding costs – particularly for covered bonds and securitisations backed by higher-quality, energy-efficient collateral – and into stronger investor appetite for green and sustainability-linked bond issuance.
Any spread advantage is likely to be modest and gradual. But in a fiercely competitive market, even a few basis points can support sharper pricing on green or “better buildings” products, stronger retention offers for energy-efficient borrowers and ongoing investment in the data and systems needed to meet evolving regulatory expectations.
For brokers, the FCA’s ESG ratings regime will not change case placement tomorrow – but it will shape the medium-term landscape.
